The Back Door Roth IRA: What It Is, How It Works, and Who It's For?

This is the Truth Network. Um Welcome to Finishing Well, brought to you by CardinalGuide.com with certified financial planner Hans Scheil, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing Social Security, Medicare, IRAID, long-term care, life insurance, investments, and taxes.

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Well, welcome to Finishing Well with Certified Financial Planner Han Scheil and today's Shore Show. Is the back door Roth? IRA, what it is, how it works. And who it's for. And so, in this whole idea of Roth IRAs, and certainly in the backdoor idea, you know, it has to do with stewardship, not hoarding, because in 1 Corinthians 4:2 it says, Moreover, it required in stewards that a man be found faithful.

Biblically, money really is never ours. It's entrusted to us, right? And a backdoor Roth IRA is simply using lawful tools wisely to steward what God has already entrusted to you. He entrusted you to invest it, obviously, because what happened to the steward that didn't invest?

So you're not hiding money. You're not cheating. You're just simply using what Caesar allowed to become. You know, less dependent on Caesar.

So, so they did these rules so that people would take full advantages through planning in order to take care of their families, themselves, our wives, right? For those of us that are working and our wives aren't anymore, you know, all those things are entrusted to us to be good stewards. And I really love the more I know about IRAs and the more I know about Roth IRAs specifically. I can just tell you, Hans, I sleep really good at night knowing, okay, this is going to be really good for Tammy. This is a really beautiful thing.

Oh, it is. Yeah. I'm obviously in that camp. And with any Client or potential client coming in to see us. I mean, the first thing we want to learn is where do you stand on this?

Yeah. I mean, some people come in here and they're They've been talking a lot to the brother in law. you know, perhaps know-it-all brother-in-law. or somebody else from work that they think that you know, a rough IRA is the dumbest thing that they could ever possibly do. Why would I pay taxes?

Yeah. that I can postpone till later.

Okay. Why would I make my IRA smaller? by paying taxes In the present, that I could wait till later. I mean, and I want to honor that school of thought. I mean, there's a whole bunch of people that are so there.

that we want to find that out and if they're not movable We're not going to peck around at that. We're going to try to. We're we're just going to skip over I mean Roth IRAs are just one of the things we do for people. we can never have the first Roth and still help people greatly. with their IRAs, with their 401ks, with their whole retirement plan.

But I want to find out kind of where you are. Yeah. So a lot of times people will come in saying things. They give us an indicator and I'll always ask them, I say, so tell me where you stand on this subject. And then I'll try to shut up.

And I'll let them talk. And then a lot of times, fairly quickly, I'm going to get people saying, you know, I don't really understand enough about them. to really have a grounded opinion. And then they say, I've come to you. mister Schile, because I want you to tell me where you think I ought to be.

And I said, now we can get somewhere.

Okay. Um The other extreme is we have people come into us that have listened to our shows. They've read some articles. And they just love the fact of a tax-free account, and they're 100% the other way. They want to get everything in a Roth IRA, and they want to make it all tax-free.

And they want to do it right away. And that's That's not necessarily. a good place to be either.

So if you're If you're gonna Get your money into a Roth, and you're going to get it tax-free. It's generally. smart to do this over several years.

Okay, and when I say several, that might be three or four or five. That might be 10, that might be 15. And that might not be all of it. That might only be half of it.

So, people are all over the place.

So, we want to find out when you come to see us, or we do a Zoom, and we're going to have several meetings. I want to find out where you stand on this. If you're just straight up and you say, I really don't have a grounded position, this is what I think, and you really are looking for us to tell you the opinion, I got to look at your money first. I got to see how much you have in an IRA, how much you have outside of an IRA, how much you have on a 401k. How much your Social Security is going to be?

How much you need to live on. What are you going to do when the first one of you dies if you're married? And what is the widow or widower? look like living on with what you have. I mean, I got to look at all those factors.

before I can tell you where I stand for you on the whole Roth concept. Yeah. Um but that generally is going to lead most people to some part of your money. Needs to be in a Roth, and you need to have a plan perhaps to convert some of it. over a number of years So that you when you get up there in years or you're Spouse is a widower widower.

that they're left with a tax-free account. of some size. that they can live on. during their upper years. And then it's really better to pass tax-free money to the next generation.

than it is to pass taxable money. If I was given a choice as a beneficiary, I'd much rather have Roth IRA money come to me. Then I would regular IRA money because I got to pay tax on the regular IRA money. Yeah. most beneficiaries are not given a choice, they just get what they get.

And in financial planning, what we can do is we can think through all of this stuff for you. Yeah. come up with a plan. based on your money.

So the topic of today's show is the backdoor Roth IRA, which is one way for us to get money Um Into a raw where it's now a growing tax-free. if you've got a lot of other doors closed to you because You either have too much money or you make too much money.

Okay, does that m make sense, Robbie? Yeah, so Or am I wrong that if you're not working... That also is going to be a hindrance to you if you're going to put money in a Roth, right? It is.

So if you're not working, you're already retired and you don't have any. for work income Well, you can't do a backdoor Roth IRA. You can't do any IRA because you've got to have. working income service income in order to contribute. Right.

But that doesn't mean Roth IRAs are out of the question for you. If you've got 850,000 sitting in your 401k. And maybe you're even taking some of it every year to live off of. Because you're already retired. Roths are still not out of the question for you because we can do what's called a Roth conversion.

Yeah. Um In fact, we'd rather do that than one of these backdoor Roth IRAs. When people come to us, And we have the Roth conversation where And now they have a desire. to s to build up this tax-free account.

Well, we're going to go to their existing money And seeing Like if you're still working and you're in a 401, are you contributing up to the maximum? And if you're not. Then we're going to have you contribute through your job. And then you can contribute through your job in a 401k and most 401ks directly to the raw. You're not going to get a tax deduction for it.

But It's still going to go directly into a roth. You can take the money that's in a pre-tax. 401k And you can do a conversion with many plans. Write in the plan.

So there's all kinds of things if you want more raw. Money that we can do as planners or we can help you do as planners That don't involve contributing to an IRA. They're doing a conversion. Make sense? Yeah, exactly.

And that I that's why I I'm glad I brought that up because I I think that's part of You know, one of the things a lot of people are looking at, they're already retired. I can't contribute, and that's the key word. You can't contribute to an IRA because. You're not working anymore.

However, you can convert. money that you already have in a traditional IRA to a Roth IRA. And as you say, once you paid the tax on that, then you no longer have that liability to the government. And now every dime in there will never be taxed coming out, nor will it be taxed on the income.

Okay, and so this decision It's really the Roth. conversion decision for the person you just described. A lot of people that are listening to the radio today and they've heard a little bit about Ross. maybe already rejected it, didn't want to look into it further, and now they're hearing enough. It To me, it's not good enough to just say, okay, yeah, I'm sold.

I like that. I'm going to go do some Roth IRA. On my own. And I think that's fine. I think you go do that.

But I think it would be wise to look at your whole situation. Yeah. See, 'cause there's some people a Roth conversion doesn't make sense for. Like if you've got. $240,000 in your IRA.

And you got a social security check of 2,500 a month. and your spouse has a Social Security check of a thousand a month, And you're living off of you know, let's just say five grand a month. $4,500 a month, which is a lot of people. It probably doesn't make sense. For you to convert some of your two hundred and some thousand of IRA money.

It's probably better for you to just live off it. because you're not paying a lot of taxes. on those withdrawals unless you took out a big chunk. Um So This isn't for everybody. Uh having a Roth and having a Roth in a large way.

So now I'm really talking financial planning to you. But I'm thinking that the whole idea around It would be advisable for you to develop your own opinion. for your own money of where you stand on the Roth. the whole idea of a Roth. is to develop that, and I'd be glad to help you develop that.

as a financial planner. Yeah, yeah. But also, again, you take that guy and it could be me, right? And so I I'm currently working, I'm currently on my social security, but I can take my four hundred one K since it's there and I can put it into a Roth rather than going into a traditional IRA. And for me in my age, Since that's a choice that appears to be a no-brainer for me.

Is Even though I'm not anywhere close to the guy that's got $300,000 in a Roth. But still, for what I do have, there's no reason I wouldn't put that money in a Roth, right? Yeah, and you do this for several years. You'd be amazed at how much you're going to have.

So, this will be a good time to remind us that this show is brought to you by Cardinal Guide, CardinalGuide.com. And beautifully at CardinalGuide.com under the IRA tab, you know, they have the seven worries tab, IRA being one of them, is an amazing video that shows. All sorts of the structure behind the back door IRA and a lot more information. If you find this fascinating, I know you're going to love the video. It's all there at cardinalguy.com again under the IRA tab, as well as Hans's book, The Complete Gardenal Guide to Planning for and Living in Retirement.

And the all-important, if we're talking about this planning idea, you know, contact Hans and Tom and go over this stuff with them again. Whether you're the one that's got, you know, three million dollars in IRA or you're the guy, you know, like me, you know, that is still working on that little nest egg, whatever that may be. There's nothing like using the wisdom that God has made available to us. We'll be right back with a whole lot more on the back door IRA: what it is, how it works, and who's it for. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM.

a registered investment advisor. BCM and Cardinal Advisors are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with Certified Financial Planner Hans Scheil, and today's show.

The Backdoor Roth IRA, what it is, how it works. And who's it for, Hans?

Okay, so Now, I'm going to try to simplify this, and I completely confused Robbie. on the video Because he was trying to go with me step and there's just so many rules and regulations. This backdoor Roth IRA, please don't try this at home. without professional assistance.

Okay? I'll be glad to. qualify you for this. You just give me a call, and I'll tell you whether one of these might be appropriate for you, and then I'll help you do it. to make sure you weave in and out of all the regulations.

But in a nutshell, if you're over fifty And you are maxing out All your other options with your 401k or your IRA or Um And you really have a desire to get more money in a Roth, I'm going to show you how to do it. And if you have too much income, to contribute to a raw This backdoor Roth IRA might be for you. Yeah. What Some people are surprised to learn is There's such a thing as a non-deductible. IRA contribution.

So And that goes way back to the 70s when the IRA was invented. You could put in $1,000 or $1,500 maximum. And that's gone. That's uh Now if you're over 50. to $80,600 in 2026.

Um per person If you're a married couple.

So that's grown quite a bit since the 70s, but there's this thing as the non-deductible contribution. which not too many people ever did this. But it you know the just the difference is is if you put a thousand dollars in an ira and you take that right off your taxes, it's deductible, now you've got pre-tax money in that IRA. And that's the way most people do it and then all the growth, you don't pay taxes until you ultimately draw it out and then you pay taxes on every dollar coming out of it. But you've had this thing called the non-deductible contribution, where people say, you know what I'd like to do?

is all put $500 Under deductible, and I'll take that off my taxes, and I'll put in 500 as non-deductible. And There was a lot of HR managers telling people to do this years ago.

So all that meant was you're not going to have to pay taxes again on that $500.

So And there was an accounting responsibility that fell upon you.

So Consequently, very few people have non-deductible Contributions in either their IRAs or 401ks. And if you do, by the way, It now might be a good time to deal with this. Rather than just waiting till 10 years from now or something when you're trying to get money out of there, because it gets very confusing. pulling money out of an account that has some non-deductible um money in there.

Now the Roth IRA was invented in 1997. and it didn't show up in 401ks until several years later. But the the Roth pretty much outdated or made obsolete the non-deductible contribution because With a Roth you don't get to deduct the contribution. But then the all the earnings is tax-free. As long as you're alive.

And there's no minimum withdrawals. The the Roth IRA Has really eliminated the need for the non-deductible contribution. except in this situation.

So this backdoor Roth IRA is clearly an exception. and the government has talked like they were going to eliminate these things. for this whole strategy. But they haven't to date through two secure acts. And so I still take advantage of this every year.

Yeah. You know, I'm doing the max that I can over in my 401k. And I'm doing it all as Roth. Again, I've got an income which is too high to contribute to an IRA. but I can do a non-deductible contribution.

of eighty six hundred dollars into a non-deductible traditional IRA. And I can not only do it for me, my wife is not working. but I can do eighty six hundred for her too. Based on being my spouse.

So we're able to get. 16,000. $200. Um Into this Roth excuse me into a non-deductible IRA Between the two of us and then we immediately convert it. to a Roth IRA.

And we don't pay any taxes. On the conversion, because it was already. post-tax money And now I finish this whole transaction.

Well 16,000. It's actually Um sixteen thousand two hundred dollars More then I had No, it's $16,600. more than I had Um To start.

So in or off. Does that make sense to you, Robbie? I think so. Let me walk us back through for a second.

So essentially You're taking It it must be two R A's, one for your wife and one for you, right? That's correct.

So you're you're each putting The eight thousand eighty six hundred dollars. into that traditional IRA after tax So it's it's similar to an IRA as far as how you put the money in, but It's a traditional IRA that it's going into, which is allowing you. Because You're able to put that much money into that IRA, and now you've got the money so that you can. Um do a conversion. into the Roth.

Right? That's correct.

Without paying taxes. Right. Because. the the eighty six hundred bucks had already been taxed. It just came out of our regular account.

And I do this every year. As long as they're gonna let me. And as long as I'm making money. Um which just builds up my Roth account even higher. Yeah.

Yeah, and it's really That's kind of all you need to know about it. And then you don't go do this on your own. Um if you come to us Again, I'm going to go back to the first part of the show. Is the first thing we're going to do. is just walk through you maybe quickly to find out your position.

on Roth IREs, we want to make sure that doing a Roth is the right thing for you to do.

Okay. Yeah. Then once we're there, we're going to want to look at your money and see if you can use other means. Other than this backdoor Roth IRA.

So we're going to want to advise you. We may go to your 401k and having you making some changes, and we may do a backdoor Roth. Um Only for your wife or husband. Or we may do it for both of you. But you need to meet a bunch of criteria.

and you need to have taken advantage somewhere else. before you get into this. And then, if this is right for you, we got other things to think about: the pro rata rule, like if you have other IRA money sitting there. That Either you or your spouse. Is that Maybe it was a rollover from a prior job, or it's from contribution, it's not a Roth.

Then we're going to have problems with this whole transaction. We're going to fall under something called the Pro Rata rule. I don't want to attempt to explain that on the radio. But we know about all this stuff. And we're professionals.

And so we just go down a checklist. and make sure this is right for you and then once you It is right for you. We'll help you get it all set up. and get the money. doing the right things at the right time.

And then we'll check all the boxes. Um and you'll finish the game with more Roth IRA. And with most people, we do these we're doing a whole financial plan for them, or we did one in previous years. And so we're just committed to a strategy. It doesn't actually take us that long.

once we know your stuff. Yeah, it's it's absolutely beautiful and and I don't think there's any You know, understating what it looks like when the money transfers to the next generation if that's part of the strategy of your IRA money. is to get it to the next generation. And in doing that You know, again, if the, you know, my, whoever enters, you know, my not-so-large IRA, but whoever gets it, right, they will have if it's, you know, if it's $50,000 or it's $75,000, there's no taxes to be left to paid on it. I mean, they get it.

Here's a check. And now you can invest it in your own Roth IRA or whatever you want to do, right? Oh yeah. I mean, it just, and it's a wonderful thing. for a widower widower to have because when you're facing that widow's tax where you're paying higher tax rates because you're a single tax filer.

and you got to pull money out of a taxable IRA to live. It's really nice to have this other little buffer account. Or maybe a big buffer account that's tax-free, you can just pull from there and it keeps your tax rates low. when you're older. And so this is going to be the last money you're going to spend.

Typically Because the nice idea is passing it on to the next generation. tax-free. That's a sweet thing, but it's really y you're not giving it to them now because you might need it in your later years. They also don't have minimum required minimum distributions on Roth.

So The more money you can get there, it's going to make RMDs smaller. Um And for you young people listening, or you want to talk to your kids, both of my sons. One of them is married, one of them is engaged. I've convinced all four parties to do their contributions as Roth. Because I've shown them.

how much that tax-free compounding is going to do for them over thirty or forty years. even with a small amount of money. This is something you really need to be selling to your kids and grandkids. Um Maybe even helping them out with it if you're in a position to do that. Yeah, it's absolutely it's absolutely a beautiful Beautiful thing.

Well, again, this is a time we can remind you that all these resources and all are brought to you by Cardinal Guide, CardinalGuide.com. If you go to CardinalGuide.com, you're going to find, as we talk about, the Seven Worries tabs today's being the IRA, right? And if you look at that, then there is a beautiful video. It gives more details on exactly what the backdoor IRA is and who needs it, etc. And show notes that are just spectacular, a board with all sorts of details.

It's all there at cardinalguide.com, as well as, of course, Hans's book, which goes into a lot about Roth IRAs. It's the complete Cardinal Guide to Planning, Foreign Living, and Retirement, a wonderful workbook to go with that. And then again, the all-famous and most popular Contact Tom and Hans page, especially if you want to try this backdoor, you know, you may qualify, you may be, that may be yours.

Well, I can assure you, based on what I've learned over the last few hours. You want to contact Hans and Tom? It's all there at cardinalguide.com. Thanks, Hans. Great show.

Thank you, and God bless you. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such. Any statements or opinions are subject to change without notice. Investments involve risk and, unless otherwise stated, are not guaranteed.

Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation. Finishing Well is designed to provide accurate and authoritative information with regard to the subject covered.

Investment advisory services are Offered through Brookstrone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. We hope you enjoyed Finishing Well, brought to you by CardinalGuide.com.

Visit CardinalGuide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes, as well as Han's best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement and the Workbook. Once again, for dozens of free resources, past shows, or to get Han's book, go to CardinalGuide.com. If you have a question, comment, or suggestion for future shows, click on the Finishing Well radio show on the website and send us a word. Once again, that's CardinalGuide.com. CardinalGuide.com.